How to play the long game to stay in the game

As real estate investors, we now have so much information at our fingertips. We have access to real-time data from numerous sources, we get daily email updates on the market, and we refresh the treasury rates throughout the day.

We can look at deals faster than ever and make decisions in real-time with input from teams based worldwide. 

Every buyer says that they will move fast, and many organizations have “SWAT” teams to throw resources at everything from due diligence to lease-ups. 

All of this speed is a good thing, but in times like this, it also obscures the fact that real estate is, in its nature, a relatively slow business, and, despite the hype of the last few years, it is generally a long-term investment.

Going from a sprint mindset to a marathon

If you think about it, it takes years to develop a property and get it leased up and stabilized. If rent grows at a more normal rate of 3%, it takes a while to get your income up enough to hit your return targets, and if interest rates and cap rates go up, investors will need even more time to grow into their proforma. 

This can be a sobering thought if you have a short-term business plan, but, if you are in it for the long haul, there is an old adage that time heals all wounds. 

Many of us have been chasing the same type of deals over the last few years, and being opportunistic is smart business. 

It’s also wise to see when the landscape changes and to adjust business accordingly. Today’s market is defined by higher rates, fewer products and slowing rent growth.

Deals have gotten a lot harder, and you have to kick a lot of tires, be creative, and put in the work to get things done now. You can’t just expect to update some units and make a lot of money instantaneously.

While it might not be easy anymore, I can guarantee you that there will be people who still make a fortune in real estate over the next five to ten years. The question is how.

The key to long-term success: getting back to basics

Some investors might find an angle or find those elusive distressed deals, but most of them will succeed simply by getting back to the basics. What does that entail?

• Adopt a long-term view over quick flips and focus on the market and property location.
• Be extra cautious with strategies like Value Add 2.0, as renters are more discerning when they are paying higher rents, and you might not get a sufficient return on those improvements. 
• Have the right debt strategy for the current market. Short-term loans with variable interest rates are now a mismatch for the current environment. Loan assumptions can take the guesswork out of an ever-shifting interest rate environment. If you need new debt, lower leverage and a fixed rate will provide the necessary runway to execute a business plan. Acquisitions are really a math problem, and understanding the interplay between the cap rate that you are paying, the interest rate on your loan, and the growth that you are projecting. Each market and submarket are different, and you need to understand the dynamics of each. 
• When it comes to projections, be realistic with rent growth and understand that there are a lot of land mines out there on expenses. We’ve all seen the huge increase in insurance costs and local jurisdictions pushing valuations on real estate taxes to make up for lost revenue. Value add projects take more time, and costs are up. 

Patience is a virtue

One of the toughest things for many of us to have these days is patience. There is still a large bid-ask spread on acquisitions, and it is going to take some time for that to work itself out. The old saying that sometimes the best deal that you do is the one that you don’t do has never been truer. 

We are not believers in sitting on the sidelines and are underwriting new deals every day. Our philosophy has instead changed from “How do we stretch to get it done?” to “Where does it make sense today, and let’s stick to our guns.” 

The long-term trends are still very positive for multifamily, particularly with an ongoing shortage of affordable housing in the U.S. The huge development wave we see today is projected to abate in the next 12 to 18 months. The market will correct itself, but it just takes time. 

When we started RailField nearly a decade ago, someone told us that the real sign of a successful and long-lasting firm in our business is one that makes it through more than one cycle. 

Unfortunately, there will be some that don’t make it through the current environment. Most of us, though, can achieve all our goals by taking all the real-time information and all of the innovations available and adapting it for a long-term view.

Modified Date & Time : 31 Oct 2023, 02:13 pm

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Author

Jon Siegel

Jon Siegel is the Co-Founder and Chief Investment Officer of RailField Partners. Prior to forming RailField, Jon was a founding partner of J. S. Watkins Partners, an advisory firm that has advised clients in over $25 billion of multifamily transactions. The firm was also retained by HUD as its exclusive Loan Sale Advisor for all of its multifamily loan sales.

Prior to forming J.S. Watkins Partners, Jon was Director of Structured Transactions in Fannie Mae’s Multifamily group, responsible for identifying, structuring, negotiating, and closing large-scale transactions with many of the nation’s largest lenders and property owners.

Jon also served as Director of Acquisitions at NHP Incorporated, the largest owner and manager of multifamily real estate in the nation, where he was responsible for transactions involving the purchase of real estate, partnership interest, and operating companies. He has over 25 years of experience in the multifamily industry and expertise in strategy, acquisitions, and financing.

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